Business Owners: Choose Fiscal Year Ends Carefully

From a business standpoint there can be many advantages to choosing a year end that will be the most suitable to your business; for example, a corporation may choose to time their fiscal year end before their busy period in December in order to defer the tax payable on the net income earned.

A fiscal period is any period of time for which an enterprise prepares its accounts. Most business enterprises have a fiscal year, and many report more frequently and also have fiscal months and fiscal quarters for internal reporting purposes.

Strictly from an accounting perspective, there are no constraints on the fiscal period an enterprise can choose. Thus, accounting records can be maintained and financial statements can be prepared for any period of time that provides useful information to the owners and managers.

There are often government-imposed regulations which restrict an enterprise's flexibility in choosing its fiscal periods. Most of these arise under the Income Tax Act. Some of these restrictions apply generally; some vary with the type of organization.

General Restrictions The Income Tax Act provides:

• a new fiscal period starts immediately after the end of the prior fiscal period,
• a new fiscal period must generally end 12 months after it began,
• a corporation is permitted to have a fiscal period that is up to 53 weeks long,
• a professional corporation must use a calendar fiscal period,
• the general rule is that the fiscal period for a proprietorship must end on the last day of the calendar year in which it began. However, see the more detailed commentary below,
• once a fiscal period has been established, it cannot be changed without the prior written consent of the taxation authorities. Permission will only be granted where the change is requested for business and not tax-planning reasons.

Proprietorships The general rule is that any business enterprise carried on by an individual must have a calendar fiscal year, to coincide with the individual proprietor's taxation year.

The Income Tax Act does permit most individuals to elect not to report their business activities using a calendar year fiscal period. However, where such an election is made, the individual is required to report a notional amount of income on his or her income tax return, to represent an estimate of what the business's additional income would have been if the fiscal period had not ended before December 31. Because of this accounting for notional "stub-period incomeî, very few individuals elect to report business income on anything other than a calendar year fiscal period.